The reckless and the cautious at the PSX4 min read

OFTENTIMES it is the fear of missing out that dictates the dynamics of the stock market.

Battered alternatively by political and economic uncertainty since the market started to melt following the MSCI Emerging Market Index entry debacle in May 2017, the Pakistan equity market took a dramatic turn in the last 10 days of the outgoing month.

The big worry at the time was the economy that Prime Minister Imran Khan conceded was doddering on the tipping point of bankruptcy with a growing balance of payments crisis and fast depleting foreign exchange reserves.

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That is when Saudi Arabia’s financial assistance package of $6 billion was reported. The announcement prompted the bulls to stage a spectacular rally at the Pakistan Stock Exchange (PSX).

On the same day, the benchmark KSE-100 Index recorded gains of 1,580 points which in percentage terms worked out to 4.2 per cent, the highest single day gain seen in three and half years. In the eight sessions following, the bulls have continued to hold sway leading the market up by 12pc.

Market strategists came up with similar reasons for aggressive buying by mutual funds and individuals and the cautious stance taken by banks, insurance firms and companies

At the height of despair before the Saudi financial assistance package, the Index plummeted to its lowest at 36,663 points on Oct 16. In the 10 trading sessions to Oct 31, the bulls charged and the Index stormed past several psychological barriers to post gains of a whopping 4,986 points, translating to 13.6pc.

Figures accumulated by analysts show that while banks’, companies’ and even brokers’ proprietary trading missed out on the rally, mutual funds were the first to seize the opportunity. In the 10-day run up, the funds turned out to be lead buyers of shares worth $26 million.

The mutual fund industry has grown enormously in size and scale with assets under management for Open End Mutual Funds at Rs586bn at the end of August.

Yasir Qadri, CEO of UBL Funds, one of the five largest funds operating in the country with Rs75bn under its management, affirmed that mutual funds retained around 10pc cash. With the stock trading at attractive valuations, the funds were quick to deploy this amount, lest they miss out on the expected rally.

The other major participants to take the first mover advantage were ‘individuals’ who bought $12m worth of shares in the 10 early days of the bull run. During the period, companies bought shares valued at a low $2m while Insurance companies sold shares of $2m and banks disposed of equity of $9m, believing it to be the best time to book profit.

Hamad Aslam, director, head of Research and Business Development at Elixir Securities explained the phenomenon. He asserted that mutual funds were sitting on idle cash which they aggressively deployed after the Saudi package announcement.

“As at end September, we estimate shariah compliant and conventional equity mutual funds to be vested with liquidity—in the form of cash and Treasury Bills of around Rs20bn—which account for about eight per cent of their assets under management. Liquidity with other mutual fund categories such as allocation, balanced and funds of funds was additional,” he asserted.

Individuals also aggressively bought stocks. Unlike institutional players, retail investors are swift to enter when the going looks good and the first to stampede to the exit when shares start to fall.

Mr Aslam elaborated that banks also seized the opportunity to book gains during the rally. “Treasury divisions in banks have to balance off their risk-return investment profile in a more disciplined fashion. Amidst an inevitable economic slowdown and ongoing monetary tightening, they probably preferred to switch to fixed income investments which are now starting to offer much higher returns.”

Other market strategists came up with similar reasons for the aggressive buying by mutual funds and individuals and the cautious stance taken by banks, insurance firms and companies.

A portfolio manager at a large pharmaceutical company said that unlike mutual funds and individuals who had a short-term perspective on the market, companies, banks and insurance firms were long term investors. Besides, money management was supplement to their core business.

“The board approves quarterly investment plans and the portfolio manager is answerable to the treasury department and the company’s CEO, which is why he cannot be carried away by sentiment.”

In the mutual fund industry, the whole business revolves around deploying certificate holders’ money for best returns. With the industry growing at a rapid pace, the competition gets tougher for Fund Managers to outperform their peers. It is they who spend sleepless nights on fear of missing out.

Among individuals, high–net-worth individuals usually are deep pocket investors who can afford to hold on to the stocks in the event of a sudden correction.

But small investors, speculators and leveraged buyers forever run the risk of loss. They are guided by sentiment and rumour, running after stocks without any intelligent study, research and analysis. So when the bears charge they are the first to be mauled.

Interestingly, however, despite having burnt their fingers several times, once the tide turns and the market heads north, greed drives these individual investors in droves to the market in the hope that this time their luck would hold leading them to riches.